Lean business operating model

The concept of a lean business operating model is a scenario plan that identifies the core business functions which have a direct impact on the delivery of your product.

The model can support you in determining whether areas of your business add value or revenue and can secure the long-term viability of your business. Screen Shot 2013-06-18 at 15.13.40

A typical business cycle goes through periods of Growth where demand and revenue are increasing. Once it reaches it’s Peak, revenue remains steady and is then followed by a period of Recession, where revenue is in decline. In some businesses, this cycle can complete within 6 months and in others, several years.

The most robust businesses are able to balance their operation in such a way that the scaling up and down of resource adapts quickly to fluctuations in demand.

During periods of growth, business is thriving and you inevitably increase your cost base to keep up with demand, whilst still reaping the rewards of greater revenue. In parallel, a number of businesses go through cost creep, whereby they increase spending in areas that do not have a direct impact on the end product or do not add any significant value.

Calculating your minimum operating model can reduce cost creep as there is a greater focus on core services that have a direct impact on your end product/service and not those on the periphery.

Begin by adding the key responsibilities of each department in your business to an organisation chart. Using this updated organisation chart, identify the business critical functions with a coloured pen. These are functions whereby if they did not exist, the performance of your end product/service would be negatively affected in a major way (i.e. in a way that is very noticeable to the customer).

Once all functions have been identified, the model should be updated to include the total cost attached with each responsibility. It may not always be possible to get an accurate figure, in which case an estimate should be used.

The total cost of each of these functions in comparison to your total operating budget will show the lean operating model; the core functions of your business that add value and revenue.

The purpose of the exercise is not to reduce your cost base to a point at which you can no longer grow. It allows you to identify the functions that form part of your core service so that you can quantify the impact of peripheral functions and avoid cost creep. It also challenges you to look at the financial importance you place on each responsibility within your organisation and how that aligns with your corporate objectives.

Use this model to inform the growth of your organisation, not the retraction.

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